Portfolio refocus towards retail and hospitality sector

It’s the National Day long weekend and I thought I take some time to reflect on my recent buy/sell actions in the past 2 weeks. It was a crucial revamp of my portfolio and one that sees a shift from the travel towards retail and hospitality sector.

So in my earlier post, I elaborated on my rationale (late) on dumping all my Airline stocks. I vacated entirely from the airlines sector, except retaining the 2000 units of Singapore Airlines mandatory convertible bonds and odd lot of 50 SIA shares.

I made 4 buys — 1 HK conglomerate, 2 retail REITs and 1 hospitality REIT.

Conglomerate — Swire Pacific B (0087.hk)

Swire Pacific is a HK-listed conglomerate with business in segments that include property, beverages, aviation, marine services and trading and industrial.

One key flaw and lesson learnt the hard way is not to be vested in stocks who have a very close or interlinked relation. Swire Pacific is Cathay Pacific’s principal shareholder, with a 45% shareholding. Investing in Swire Pacific would mean an indirect investing in Cathay Pacific as well. Thus, when Cathay Pacific took a deep plunge in revenue (and still is), Swire Pacific dived as well.

What interests me however is its business segments of property and beverages.

We know that in space-constraint Hong Kong, property prices and rental rates can only go upwards, at least still valid for years to come. Swire also has a couple of future property projects stated for completion between 2020 – 2024. These would contribute to the revenue going forward.

Swire has been a Coca-Cola franchisee since the mid-1960s and an anchor bottler in the Coca-Cola System. Soft drink production and distribution continues to be one of the group’s core activities. Even through COVID-19, Swire continues to see and expect strong profit growth — humans still have to eat and drink. I must admit a bottle of Cola lowers the stress level for me at times.

Its marine services unit has been consistently making losses since 2015, and together with the weakness in the aviation unit, both segment weaknesses would have already been priced into its current share price for the market bottom. I do not foresee any more bad news in these 2 segments to bring about further drastic dip into its share price.

Retail — Capitaland Mall Trust (C38U) and CapitaRetail China Trust (AU8U)

Retail is the other sector that I am looking at. Though online shopping is still rapidly surging in volume and transaction value, I believe that physical retail space, especially the well managed ones, are here to stay. Shopping is a social activity, shopping malls are more than just a social attraction. No matter how much online shopping or activities you could do online — order Grab food or Uber eats, watch Netflix or YouTube, skype or facetime with your friends — people still need social attractions to eat, watch a movie, meet up with friends etc.

Ask anyone who is stuck at home or working-from-home for a prolonged period of time. Needless to say, whoever can make potential shoppers happier on premises would be able to make the most revenue on actual and auxiliary spending. This is what we can relate to as retail competition, and only the strongest can survive.

While gross rental income was affected by rental waivers to tenants, I see this ‘loss’ as a win-win situation for both tenants and landlords — by supporting and extending your tenants’ lifeline, you indirectly plan your well-paved path for future income. Both REITS took a hit from reporting lower revenues in 1H 2020 (which was expected).

With the easing of lockdown measures as a catalyst, I would expect a steady recovery for the retail sector as Singapore economy recovers from the pandemic, and the much awaited impending merger of CapitaLand Mall Trust and CapitaLand Commercial Trust. China is taking the lead in recovery from the pandemic and I would expect retail spending to “return to normal” earlier in the Chinese market.

Hospitality — Far East Hospitality Trust (Q5T)

I believe tourism would be back one day in the not too distant future. This would in turn boost the hospitality and retail sectors. Airlines would take a much longer time to recover, one of the factors depending on the international flights they would be allowed to operate to.

While Singapore lacks the domestic market demand for air travel, it has the domestic market to tap on for staycations. During COVID, hotels under its portfolio had reservations from government agencies for isolation purposes as well as companies that required their Malaysian workers to stay in Singapore (due to Malaysian movement control order). After the relaxation by government in July for selected hotels getting permission to reopen, bookings have surged by citizens in need for a break — staycation in local hotels. When travel is next allowed by air, land and sea, we would expect to see even higher occupancy levels.

FEHT has a nice portfolio of mid-tier to upscale hotels / serviced residences, and with gross revenue for 1H 2020 decreasing 20.6% year-on-year, this news was not as bad as I would have expected with borders closure and circuit breaker.